Research Dept. News
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Monthly Report, num 330 - December 2009
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European Union - United Kingdom
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United Kingdom: the end of a longer than expected recession
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British GDP fell 5.1% year-on-year in the third quarter.
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As noted in the first estimate, the British economy did not manage to grow in the third quarter of 2009 and its recovery continues to lag behind that of the main world economies. The final figure, slightly upgraded, indicates a quarter-on-quarter drop in GDP of 0.3% in the third quarter (5.1% year-on-year).
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The fall in private consumption slowed up during this period, something partially anticipated by the clear improvement in key early indicators for demand over the last few months, such as retail sales and consumer confidence. However, the still restrictive conditions for credit and the rise in VAT in January threaten to prevent this positive tone from becoming consolidated. Trends in the labour market, marked by a fall in payments rather than high job losses, are also damaging household consumption.
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The foreign sector will be one of the key factors in recovery.
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Investment has corrected its downward slide, in the third quarter falling 0.3% quarter-on-quarter in contrast to its drop of 5.2% in the previous quarter. The greater optimism shown by the main economic and business sentiment surveys also reinforce the idea that a change in trend is coming about. However, other indicators such as the continued reduction in industrial production make us a little more cautious about these promising conclusions.
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The positive impact of public expenditure on economic growth, a reflection of expansionary fiscal policies, will gradually fall away in the medium term due to measures to contain fiscal deficit. In fact, the year-on-year growth in public expenditure in the third quarter of 2009, at 1.9%, has been the lowest since the recession started. On the other hand, the foreign sector, which contributed 0.7 percentage points to GDP growth, will be a greater factor in the British economy's recovery thanks to the depreciation of pound sterling and the upswing in the world economy.
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The Bank of England boosts monetary stimuli.
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Undoubtedly, the prospects of recovery are improving but the upswing will take place more slowly than predicted. For this reason, the Bank of England decided to up its bond acquisition plan by 25,000 million pounds in November. However, greater monetary stimulus had been expected, suggesting that inflationary risks are of increasing importance. Nonetheless, an end to monetary stimuli in the near future is neither very likely nor advisable. British GDP has fallen over six consecutive quarters, accumulating a total drop of 6%, and the effects of the recession on the financial system and labour market will continue even with positive growth in the coming quarters.
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